Wish to shun market volatility? Go for insurers' assured return plans

Check the return for your age, tenure, and premium variant, and if proceeds will be tax-free

With equity markets turning volatile, many investors are yearning for products that offer guaranteed returns. Banks have not hiked their fixed deposit (FD) rates to the same extent as the increase in the repo rate by the Reserve Bank of India (RBI). But yields in the bond markets have gone up, allowing insurers to offer guaranteed-return plans whose returns are better than those offered by leading banks’ FDs.

These are non-linked (returns not linked to the markets), non-participating (returns not dependent on insurer’s profits) plans. Both single and regular premium variants are available.

Better returns than FDs

The key selling point of these plans is that they are offering better returns than bank FDs. “While bank FDs are offering 5.5-5.6 per cent, we are offering returns of up to 6.3-6.4 per cent,” says Kamlesh Rao, chief executive officer, Aditya Birla Sun Life Insurance (ABSLI), which recently launched the ABSLI Fixed Maturity Plan.

In regular premium plans, the popular variants are 5-5 (five years of premium payment and maturity benefit five years after inception) and 5-10 (five years of premium payment and maturity benefit 10 years after inception). 

“In the 5-5 plan, you could earn a return of 5.5-5.7 per cent while in the 5-10 plan the return could be 5.8-6.2 per cent,” says Vivek Jain, business unit head–investments, Policybazaar.com.
 

Jain emphasises that some players like Max Life are now offering the maturity benefit after five years rather than 10. “These have become short-tenure saving plans now,” he says.In addition, the buyer gets some insurance cover. The maturity benefit can also be tax free.

Some players like ABSLI are offering 100 per cent surrender value from day one, so the buyer doesn’t lose his premium even if she/he exits early.

Players like Max Life are offering a better IRR (internal rate of return) for women buyers.

Run a few checks

Check the sum assured vis-a-vis the annual premium. “If the sum assured is less than 10 times the annual premium, the maturity proceeds become taxable,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

Also understand the surrender-related conditions. “Early surrender is usually not a good idea in these plans as you may have to pay a heavy penalty and could get back only a percentage of the premiums paid,” says Arnav Pandya, founder, Moneyeduschool.

Returns in these products are linked to age. “The cost of insurance is higher for older people and that will reduce the IRR for them,” says Raghaw. The impact becomes pronounced for senior citizens who buy single-premium plans.

Returns are also linked to policy tenures—they’re usually better for longer tenures.Most return numbers shown in product brochures don’t factor in the goods and services tax payable on premium. It is 4.5 per cent in the first year and 2.25 per cent in subsequent years for regular premium plans, and 1.8 per cent for single-premium products.

Consider alternatives

Investors with some risk appetite may look at alternatives. “Consider investing in five- and 10-year G-Secs,” says Pandya. The current yield is 7.17 per cent and 7.44 per cent on the five-year and 10-year G-Secs respectively.

According to Pandya, those who can tolerate some volatility and still stay invested till maturity may consider target maturity funds (TMFs). Portfolio yields on 5-10-year TMFs range from 7.2 to 7.7 per cent currently (data is for Edelweiss Mutual Fund’s TMFs). Investors can get indexation benefit on them after three years. “Volumes are decent on the exchanges for TMFs, allowing an exit option,” says Pandya.

Who should go for them?

Investors who want a guaranteed return product and wish to avoid volatility completely may opt for these products from insurers, provided they like the IRR. “Given that the IRR will be affected by a number of factors—age, tenure, etc — ask the entity you are buying from what your specific IRR will be, and whether the maturity proceeds will be taxable,” says Raghaw.